Does computer-aided design and engineering equipment qualify for New York's research-and-development sales-tax exemption when it's used to develop more efficient production equipment?

Plain-English summary

Union Carbide Corporation produces atmospheric gases and uses computer-aided design and engineering (C.A.D.E.) equipment — floor computers, desktop terminals, plotters, graphic equipment, and related software — to develop three-dimensional models of production equipment and gas-producing plant facilities. It asked whether the C.A.D.E. equipment qualifies for the research-and-development exemption under Tax Law § 1115(a)(10).

The Department held it can qualify — but only for genuine research, and only if used directly and predominantly for it.

• Real research qualifies. To the extent the C.A.D.E. equipment performs research and experimentation to develop better, more efficient production equipment, it is advancing the technology in a technical field within 20 NYCRR § 528.11(b)(1) — a qualifying R&D purpose.
• But it must be used directly AND predominantly. The exemption requires direct use and predominant use — "predominantly" means over 50% of the time (§ 528.11(c)).
• What does NOT count. Using C.A.D.E. equipment for ordinary design and drafting, or to establish facility configurations or modify facilities to the topography of a customer's land, is not R&D in the experimental or laboratory sense. And collateral administrative/management use isn't direct use. This tracks Houdaille Industries (TSB-A-85(13)S): CAD/CAM drawing of machine-part dimensions was mere drafting, but using CAD/CAM to experiment with configurations to test design compliance was R&D.
• Bottom line. The C.A.D.E. equipment qualifies for the § 1115(a)(10) exemption only if used directly and predominantly (more than 50% of the time) for qualified research purposes.

What this means for you

CAD and engineering equipment isn't automatically R&D-exempt — it depends on how you actually use it. New York's R&D exemption reaches equipment used to genuinely advance technology or develop/improve products through experimentation. Using the same equipment for routine drafting, laying out a facility, or fitting a design to a customer's site is not research, and administrative use isn't "direct" use.

Mind the over-50% "predominantly" threshold. Even qualifying research use only wins the exemption if the equipment is used directly and predominantly (more than half the time) for R&D. Track and document the split between experimental research and ordinary drafting/configuration/admin.

Same machine, different answers. As the Department has held elsewhere, CAD used to draw known dimensions is taxable drafting, while CAD used to experiment with and test configurations is exempt R&D. Contrast lab equipment used only to test incoming materials for quality control, which the Department found did not qualify for the R&D (or production) exemption the same year (TSB-A-88(23)S, Grumman) — quality-control testing is expressly excluded from R&D.

Common questions

Q: We use CAD/engineering equipment to design our products. Is it R&D-exempt in New York?
A: Only to the extent you use it for genuine research and experimentation to develop or improve products/technology — and only if that qualifying use is direct and more than 50% of the equipment's time. Ordinary drafting and facility layout don't count.

Q: What kinds of CAD use don't qualify?
A: Ordinary design and drafting, establishing facility configurations, modifying facilities to a customer's land topography, and administrative/management uses.

Q: We use the equipment for both research and routine drafting. Can we still claim the exemption?
A: Only if the direct research use exceeds 50% of the time ("predominantly"). If more than half the use is non-research, the equipment doesn't qualify.

Citations and references

Statute, regulation, and authority:

• Tax Law § 1115(a)(10) — exempts tangible personal property used or consumed directly and predominantly in research and development in the experimental or laboratory sense (state and local, including New York City); excludes ordinary testing/inspection for quality control, efficiency surveys, management studies, consumer surveys, advertising, promotions, and literary/historical research
• 20 NYCRR § 528.11(b)(1) — R&D means research aimed at basic research, advancing technology, developing new products, improving existing products, or developing new uses for existing products
• 20 NYCRR § 528.11(c) — "directly" means actual use in the R&D operation (collateral activities don't count); "predominantly" means used directly in R&D over 50% of the time
• Houdaille Industries, Inc., TSB-A-85(13)S — CAD/CAM used to draw machine-part dimensions is ordinary drafting (not R&D), but CAD/CAM used to experiment with configurations to test design compliance is used directly in R&D

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(10)S
Sales Tax
January 15, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870901B

On September 1, 1987, a Petition for Advisory Opinion was received from Union Carbide
Corporation, 39 Old Ridgebury Road, Danbury, Connecticut 06817-0001.
The issue raised is the availability of the sales tax research and development exemption under
section 1115(a)(10) of the Tax Law for computer-aided design and engineering equipment.
Section 1115(a)(10) of the Tax Law provides an exemption from state and local (including
New York City) sales and use taxes for:
Tangible personal property purchased for use or consumption directly and
predominantly in research and development in the experimental or laboratory sense.
Such research and development shall not be deemed to include the ordinary testing
or inspection of materials or products for quality control, efficiency surveys,
management studies, consumer surveys, advertising, promotions or research in
connection with literary, historical or similar projects.
Additionally, sales tax regulation section 528.11(b)(1) defines the term "research and
development" as follows:
(b) Research and development. (1) Research and development, in the experimental
or laboratory sense, means research which has as its ultimate goal:
(i) basic research in a scientific or technical field of
endeavor;
(ii) advancing the technology in a scientific or technical field
of endeavor;
(iii) the development of new products;
(iv) the improvement of existing products; and
(v) the development of new uses for existing products. (20 NYCRR 528.11).
Sales and use tax regulation 528.11(c) defines the terms "directly and predominantly" as
follows:
(c) Directly, predominantly, exclusively.
(1) Direct use in research and development means actual use in the research and
development operation. Tangible personal property for direct use would broadly
include materials worked on, and machinery, equipment and supplies used to perform
the actual research and development work. Usage in activities collateral to the actual
research and development process is not deemed to be used directly in research and
development.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-88(10)S
Sales Tax
January 15, 1988

(2) Tangible personal property is used predominantly in research and development
if over 50 percent of the time it is used directly in such function. (20 NYCRR
528.11).
Petitioner performs research in order to produce for sale to consuming manufacturers on the
world market various atmospheric gases of greater and greater purity by using and developing "state
of the art" technology and equipment to effect the production of these gases in the most efficient
manner that allows economy of scale and cost to be met when this equipment is installed and erected
as a plant facility on the customer's property. The facility, modified as required to the topography of
the customer's land site, is directly hooked up to and feeds the customer's own production equipment.
Petitioner utilizes computer-aided design and engineering equipment (hereinafter C.A.D.E.)
to develop three dimensional electronic models of integrated components of production equipment
for sale or for integration into a plant facility that has the overall general characteristics of size and
dimension to comply with the exigency of economy of cost and scale allowing for future expansion.
The customer either purchases the newly developed gas producing facility outright to produce
its own gas, or buys a package which includes as required the constant provision and purchase of the
purest available gas delivered by client-owned atmospheric gas producing equipment. The C.A.D.E.
equipment referred to includes floor computers, desk top terminals, plotters, graphic presentation
equipment and related software, equipment and articles dedicated to the above type activities.
The use of computer equipment has already been recognized as qualifying for the research
and development exemption under certain circumstance. In Houdaille Industries, Inc., Advisory
Opinion of the State Tax Commission, May 1, 1985, TSB-A-85(13)S, it was determined that:
The use of the CAD/CAM by Petitioner to draw the relative dimensions of machine
parts pursuant to customer request as described above contains no element of
research and development and is nothing more than the ordinary design and drafting
of machine parts. However, the use by Petitioner of the CAD/CAM for purposes of
experimenting with different configurations to test the ability of the configurations
to comply with design standards falls within the purview of Example 4 as cited above
and is, therefore, deemed to be used directly in research and development.
Clearly, to the extent that the C.A.D.E. equipment is used to perform research and
experimentation to develop better and more efficient production equipment, it is being used to
advance the technology in a technical field of endeavor within the meaning of regulation section
528.11(b)(1).

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TSB-A-88(10)S
Sales Tax
January 15, 1988

However, to qualify for exemption, the C.A.D.E. equipment must be used predominantly
(over 50% of the time) in research and development. If the C.A.D.E. equipment is used more than
50% of the time in activities other than research it does not qualify for exemption. For example, the
use of C.A.D.E. equipment for ordinary design and drafting functions does not qualify as research
and development in the experimental or laboratory sense. Moreover, the use of C.A.D.E. equipment
to establish facility configurations or to modify facilities to conform to the topography of the
customer's land site does not qualify as research and development in the experimental or laboratory
sense.
Additionally, to qualify for exemption, the C.A.D.E. equipment must be used directly in
research and development. Usage in activities collateral to research and development (e.g.
administrative and management functions) does not qualify as research and development.
Accordingly, if the C.A.D.E. equipment is used directly and predominantly (more than 50%
of the time) for qualified purposes, it will qualify for the exemption provided by section 1115(a)(10)
of the Tax Law.

DATED: January 15, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.